Does Your Plan Have A Proper Fiduciary Structure?

Recently, we have dealt with an “epidemic” of retirement plans, both very large and very small, that all have the same problem – the lack of a proper fiduciary structure.  Why? As with so many personnel and benefits-related programs, new managers and new advisers simply carry on with current and past practices – without looking at the bases for these practices. Unfortunately, when we are asked to look at the fundamentals of a program, we often see that many incorrect assumptions have been made. Continue reading

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Chapter 32: How “Not” To Transition To A New Record-Keeper

Time and time again plan sponsors seriously disadvantage themselves and their plan participants by announcing the migration of their plan from one record-keeper to a new record-keeper before all the conditions for a smooth transition have been fulfilled.  Record-keepers know this and take full advantage of this all the time.  Usually, the plan sponsor is so happy to have “completed” its RFP process that it treats the selection of a record-keeper as the end of the plan migration process – rather than its beginning.  Continue reading

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Chapter 31: Is Your Comp Time Immediately Taxable?

Compensatory time off or “comp time” is paid time off taken in lieu of pay. In the case of State and local governments, the Fair Labor Standards Act (FLSA) allows them to provide non‑exempt workers with comp time in lieu of overtime. State and local governments may also provide their exempt workers with comp time in lieu of regular pay. Continue reading

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Chapter 30: Some “Elections” Do Work

Previously, I’ve written about the pitfalls of giving employees “too much choice” with respect to their pay, their paid time off and other benefits.  Employee elections that are not properly designed can unexpectedly result in current taxation under either the “constructive receipt doctrine” or the “assignment of income doctrine.” Continue reading

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Chapter 29: The “Misunderstood” Group Variable Annuity Contract

Group variable annuity contracts are often used to wrap mutual funds to provide greater revenue to plan providers or to provide access to an insurance company’s stable value fund. Every public agency 457(b) plan or 401(a) plan that offers a stable value investment option includes a group variable annuity contract.

Some contracts contain significant “surrender” charges or “back-end loads.” Oftentimes these charges continually renew as new money comes in. Some contracts restrict participant and/or sponsor access to the funds in the event of a contract termination. In many cases, the contract issuer can require a full year’s notice and continuation of the contract before the contract can be surrendered. Because the stable value fund feature of many such contracts guarantees or credits interest at higher than short term interest rates, some contracts contain a “mark-to-market” feature that allows the issuer to pay over the adjusted market value of the fund (a lower amount) rather than the so-called book value – the amount shown on participant statements. All of these fees, restrictions and adjustments can cause significant problems or issues for plan sponsors who wish to leave an insurance company plan provider for another provider. For these reasons, it is important for plan sponsors and plan committees to know whether their plans are subject to such a contract and what the contract says.

Often a prospective record keeper or investment provider will offer to pay and “finance” any surrender charges or back-end loads that may be incurred by reason of a record keeper transition. Special care must be given to these types of arrangements because the Internal Revenue Service has issued guidance indicating that such payments will generally be treated as additional employer contributions. Unless certain precautions are taken, most plan documents would require that any such payments be allocated to participants based on relative compensation – not based on the actual surrender charges assessed to them.

Because group annuity contracts are generally regulated by State insurance law, the issuers may have less flexibility to modify or change the terms of a contract. That is why it is important for plan sponsors and plan fiduciaries to fully understand the terms of their group annuity contracts. Don’t wait to review your contract until after you have sent a notice of termination to your current provider.

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